How to Save Money on Your Child’s Studies While Staying Alive
You have questions, we have answers. Each Monday we will tackle one of your topical personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week’s question is related to last week’s question and comes from the M3000P :
I would like to hear about college savings strategies (3 kids) when paying off a mortgage …
I wonder if I should stop saving for retirement to pay off my mortgage before college bills fall.
I just feel like something has to give and whether it makes sense to keep saving for some unknown retirement future, while I have a huge debt right now, followed by another one that will come in about 10.5 years.
Personally, I don’t believe in the whole “you can subtract mortgage interest” mantra. In my opinion, paying 0 percent is better than deducting.
And I live in New York where I am about to lose my state income tax deductions.
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Take your time to pay your mortgage
This question comes down to your priorities. And, according to Roger Whitney, a Fort Worth, Texas-based financial advisor and host of the Retirement Answer Manpodcast , getting your mortgage paid off faster should probably not be your top priority .
“When you pay off your mortgage or start paying off your mortgage, you are not going to set aside a ton of money in interest, and any extra dollar you throw in your principal you cannot get back, you cannot get access if you lose your job or what something will happen, says Whitney. “That doesn’t mean you don’t make an additional payment a year, but sacrificing college savings or retirement savings to pay off your mortgage, I don’t think is a good idea when you’re younger.”
Instead, focus on getting rid of your other big debts first (especially if you have credit card debt) and investing in your retirement and your kids’ education, or what matters most to you.
“By no means do I see paying for a home in the first place as a good option,” says Lawrence Soras, co-founder of New Jersey-based Mulberry Lane Advisors, LLC. “This is because, as a rule, the value of a home increases by 5% or less per year, and the value of a home increases regardless of how much capital you hold in it. If you use the additional income to pay off your mortgage, you will not be able to make more money on [other] investments. ”
One caveat is that your net worth is not counted when calculating the expected family contribution to the FAFSA. “Paying off the mortgage — increasing the value of the excluded asset — versus adding to the college savings plan — the included asset — can increase the amount of financial aid available to the student,” says Dave Bensema, Regional Wealth Leader Planning with BMO Private Bank.
Philip Weiss, a certified financial analyst and accountant at Apprise Wealth Management, adds that your retirement savings depend on their time in the market. So it is unwise to postpone them.
“If you stop saving for retirement altogether, you will lose the potential benefit of accumulating your money over time,” says Weiss. “Another thing to remember is that when it comes time to fund a college education, there are many ways to borrow to fund a college. It is much more difficult to borrow for retirement. “
Weiss, who has four children, says he was trying to find a balance between his retirement savings, his emergency fund and his children’s higher education, and he had to make some concessions – his emergency fund, he said, is not where he is. ” want it to be.
Take the pressure off yourself
But this is a good lesson for all of us. As you have seen from your own experience, most of us simply do not have enough money for everything. So take some of the pressure off yourself.
Rather than treating things as separate categories (or envelopes if you use this saving method) that must be paid in full, Whitney recommends looking at your overall balance. “If you create your balance, you have a lot more flexibility when and if life hits you,” he says. “Most people don’t have enough cash reserves when life hits them and they end up in debt or robbing their 401 (k).”
You might think that you need to accumulate four years of college and put it off on a 529 account before your child travels to U state, but that isn’t necessary and probably won’t be true. Instead, save a bit for college and retirement – prioritizing retirement – and talk frankly with your kids when they’re old enough about what the costs are.
“Almost no one can do simple math, it’s too much money, and we’ll beat ourselves to death trying to do it,” says Whitney. “So save your 10-15 percent for retirement, save something for college, and then think of it as how I create my balance and my income so that when they go to college I can just cash out. them and supplement them with 529. “
As much as your kids hate to hear it, there are other ways to fund a degree besides mom and dad taking the bill: they can work on their own to help pay, go to community college for a year or two, and then go to a four-year school, take a year off to save up, or go to vocational school.
And by the time your kids are old enough to go to college, the college landscape may look very different than it does now. “If you look at 20-year-olds today, they have a 50-50 chance of living to be 100, and they will probably have three or four different careers,” says Whitney. “If so, how can you quickly get your diploma in four years? If you are a parent and are under all this pressure, you can think of it this way – it doesn’t have to be four years, it can be six years, and they can work at the same time to help pay. “
It’s the same with a pension. We all want to plan ahead for these important life events, but using college and retirement calculators right now won’t make us 100% ready for what the world will actually look like when we reach these milestones. Instead, we need to learn to be more flexible with our money.
“I see a lot of people sacrifice their lives trying to make the simple math we use work, and I think it’s costly,” says Whitney. “Don’t give up on the family experience to fill out a few envelopes so they can go to four-year college.”